Multifactor Keynesian models of the long-term interest rate

ABSTRACT

This paper presents multifactor Keynesian models of the long-term interest rate. In recent years, there have been a proliferation of empirical studies based on the Keynesian approach to interest rate modelling. These studies evince the connection between the long-term interest rate and the short-term interest rate. However, standard multifactor models of the long-term interest rate in quantitative finance have not been yet incorporated Keynes’s insights about interest rate dynamics. Keynes’s insights are introduced in two different multifactor models of the long-term interest rate to illustrate how the long-term interest rate relates to the short-term interest rate, after controlling for the central bank’s policy rate, expected inflation, the central bank’s inflation target, volatility in financial markets, and Wiener processes.

KEYWORDS:

• Long-term interest rate
• government bond yields
• monetary policy
• short-term interest rate
• John Maynard Keynes

JEL CLASSIFICATION:

• E12
• E43
• E50
• E58
• G12

Disclosure statement

No potential conflict of interest was reported by the author(s).

Disclaimer

The author’s institutional affiliation is provided for identification purposes only. Views expressed are solely those of the author. The standard disclaimers hold.

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.